This is Course 3 in the Introduction to Blockchain course series.
Blockchain technology is in a period of exceptional growth, and the accounting profession will play a significant role in driving its adoption. Be part of the blockchain evolution with this course. Starting with a focus on the history and evolution of blockchain and bitcoin and then on to the characteristics of bitcoin, you will get a refresher on the fundamentals of money/currency and learn how bitcoin fits into the global business landscape. This course also demonstrates the unique characteristics of blockchain and bitcoin, so accounting and finance professionals will be able to have meaningful and relevant conversations with internal and external clients.
In addition, this course introduces several key concepts within the realm of blockchain, including core components of blockchain technology, the custody, responsibility and control continuum, push vs pull paradigm and private blockchain vs public blockchain, which will significantly impact the way accountants and auditors perform their job functions.

Taught By

AICPA

Transcript

So moving onto, like where else is there another excellent non-financial use case? That comes with distributed Cloud storage and retrieval. So again, you're going to see a recurring theme here which is that, when you have anything that's centralized, it becomes a big attack vector. So whether it's identities or its credit card information, like whatever that is, there's a giant silo. So you know the same thing is happened with centralized Cloud storage which is in your Dropbox, the Dropbox and like companies of the world, there have been hacks. What that information. So again, we're going to be able to disrupt that with a new paradigm here. Which is why you're going to be able to use encryption and it's kind of the same principles and so forth that we talked about with blockchains just around cryptocurrencies. You're going to be able to use those same tools to basically take data. The magical part is, what you do is you take a file. We think of it that file happens on a one-to-one ratio like you have a file and you store it somewhere. If it's in the Cloud or your computer and in the Cloud or whatever. It's like a one-to-one ratio, it's the file and its entirety, like stored there. What we're going to do here is we're going take that file, I'm going to rip it up in chunks. Like taking a piece of paper, if you took a piece of paper and you rip it up in little pieces. That's what we're going to do with electronic files, and then we're going to spread it all over the place and just send it to different computers and have it put aside. Let's say a file you ripped it up until a 100 pieces, you take those 100 pieces and it resides randomly on computers all the way around the world. It sounds crazy, right? Like how's that possible? But that's how you can do it in such a way that you can then encrypt the data so that the computers that would have your file, so you rip your file up, I got one piece of your file on my computer. First of all, you don't know what's on my computer and I don't know what's on my computer. Right. You just know it's somewhere encrypted. I don't know what it is and there's no way I can take it out. Even if I did know what that one piece was, it probably would be of limited value because I don't know where the 99 other pieces reside, and I wouldn't be able to go get them anyway and put it all back together again. It wouldn't be even cost beneficial, if you could. Likely. So that's kind of the big breakthrough here with distributed Cloud storage, as you rip up data, you spread it all apart, you encrypt it and then you have to be able to bring it back together again and retrieve it when you want to. That's why these projects have taken a long time to develop and many of them are still in the development process, but it's really, just kind of mind shattering when I think about it. How do these people come up with this stuff? It's amazing. Another disruptive non-financial use case is in prediction markets. Prediction markets are actually coming on the scene where the users are starting to adopt and create a predictions or bets and so on and so forth. So again, these things are really on the cutting edge and just starting to come into use. So prediction markets, we can think of them as a betting markets to incentivize specific behavior, but they can be used on an individual basis. You could think about it to bet really on anything, but they can also be used in our context, which is on the organizational level. So you could bet on sporting events, we think of like that. But you could also, on the organizational level, what's going to happen is we're going to end up using this to self-insure essentially what's going to happen, you can be able to make a prediction in such a way to hedge certain risks and how the outcome be that if it was to be not in your favor, let's say you've hedged the risk because you then would get you would like win the bet, because you've hedged it in the opposite direction and you would actually get financially compensated from the bet. So there's going to be a self-insurance type of thing that's going to happen. I can tell you, one of the first demonstrations of this was, ether risk was a platform. So what they did is, they created it around plane flights. So you could just bet on whether your plane flight was going to be on time or not, like that. I guess you could vary it based on, did you miss your flight by three hours or was it canceled altogether? But anyway, they performed this experiment and had enough participants that it was kind of an interesting thing and I'm not sure of what the results are. I think there was some winners involved when the flight actually didn't go off and actually this worked. It's really an amazing breakthrough. Of course, because the data is so much better to predict from, right? Like there's not as much guessing in what happened in the history when you're tracking every piece of everything that's ever happened. So predicting the future becomes more dependable. Well, it is. Some of these things, they're going to be more robust and valuable when we get to the point where we have traction and this is used as much as social media is used. These prediction markets are going to be used that way. That's when the real value is going to come into play but, the thing is where's the value proposition? Like where's the theory behind this? The thing is, it's basically like a wisdom of the crowd theory. So the wisdom of the crowd is that the entire crowd knows better than even the smartest people that you were thinking. Whoever I can get the best answer from, that's actually not the best answer. The best answer comes from the crowd. So like one example is where you know how they have the thing where you guess the number of marbles or the bubble gum in the jug, and you guessed that. So the way you win that, the good thing is, you let everybody else go and then you say, "Okay, now that everybody's done, all I ask is, can I just have all the answers?". Yeah. Right? You get all the answers. If you add them all up and take the average, you can very likely to hit the exact number. That's why you want to be the last person on prices right? Yes, that's right. So it's amazing because what you have in there is you have answers that are really way off. But collectively together, you get the wrong answer. That's kind of where the power of that comes from. Yeah. So there's industry specific applications to this as well with health care, accounting, tax, and legal. When you think about health care, I mean, this is such an area to be disruptive because, right now when you think about how much of our personal information is out there, it's spread across so many different health networks insurers and so forth and we do not own it. When we need to get our medical records, we actually have to ask permission to get them. So this really again starts flipping this whole thing on its head, where it enables the patient to share what they want to share rather than the doctors, the hospitals, the insurers pulling what they have. So what it does is provide a new interface that enables patient data sharing and creates a high availability of accurate information. So this is really important, that efficient and accurate compliance with the Drug Supply Chain Security Act is a current real-world example of blockchain disruption of this industry that's already happening. Yeah, we talk about supply chain potentially being the best use case for blockchain technology and then you take health care which is the largest industry where there's a supply chain is written all over it. I mean just the GDP of health care in this country is a large number, whatever that is, 10 or 15 percent or something. It's like the largest industry. So when you take supply chain and combine it, this is the one of the biggest areas it's ripe for transformation. Yeah, and good for us as individuals as well. So when you look at accounting, the ownership and transactional history becomes one and the same. So bank reconciliations may become obsolete, transaction clearing is essentially reduced to time zero. The reason is the transaction is verified at that time. So there's not anything outstanding that there's no bank reconciliation to be done. Because at the time of a transaction, it's being settled with the supplier vendor and recorded on the blockchain all at once. So in the traditional model, entities keep their own version of their events in their own accounting system. In the blockchain model, entities will have a shared version of the truth. So everyone has a copy of what happened in that transaction history. So for example, a vendor-customer relationship will share one version of the transactions that potentially eliminate reconciliation. Then when you think about confirmations and everything else we have to do as accountants to validate that transactions actually occurred, that is going to go away too. Because you'll be able to validate that real-time, in this new world. Yeah, like he says when you eliminate lag time, that's where reconciliation comes from. Yes. Right? So, then there's all kinds of different reconciliation that's done. But the question is, how much of what makes up the auditor and the accountant's role comes from reconciliation? Like it's a lot. Right. So to eliminate that, it's like you're eliminating a non-value added service and now we focus on value-added services. So I think this is a great opportunity for accounts and auditors. Yeah, I mean even trying to reconcile duty froms. Yeah, exactly. It happens. The favourite reconciliation. It happens instantaneously. Like think if we didn't have to do that anymore. Exactly. Now, some other examples of shared ledgers and elimination of reconciliation is instead of a customer and vendor each keeping a ledger related to the transactions, blockchain allows them to share one version, one ledger without needing to reconcile. A controller no longer has to reconcile the traditional sense of bank accounts. So cryptocurrency eliminates settlement time and therefore the need to reconcile. So there's no outstanding checks. There's not a merchant situation where credit cards are being settled in maybe two, three, five days after it happens. That way you can be as a controller or an adviser, rather than spending time on that, really evaluating the business, getting out into the business and actually understanding the operations and being able to offer the highly valued advice that these organizations want from us that help with prediction and budgeting and forecasting and what's happening in the business so that you can make immediate impacts. Exactly. Yeah, we could focus on more cryptocurrency security advisory. Yeah. I'm sure everyone is exited about it. Really important stuff. So also just continuing on accountants have a greater opportunity for value-added services which we just spoke about. The Bitcoin blockchain is an immutable ledger, but it's not inherently a double entry accounting system. So this is when things start shifting the way that we've always thought about doing accounting. So a blockchain is more like a single entry system, recording only the cash side of the journal entry between two parties. So many oftentimes this is referred to as triple entry accounting, because what happens with the block chain is that, instantaneously it's being recorded on the customer side, the vendor side, and blockchain in the middle. So for example, when I think about this in modern day, I know you hate when we compare it to something that we know but, I visualize it as electronic data interchange or EDI where, when a customer and a supplier are working together, and they're electronically can match a transaction. It's an automated transaction between the two systems that pull from each other systems and create a transaction right away. To me, this is something that is mimicking that in a broader sense, and in so many different areas, but can maybe help visualize what's happening with blockchain technology. Well, actually your EDI example that's really good example because I think that, what we're going to talk about in the coming slides here is that there's a limitation with the model as it currently is as far as it being one side of the journal entry. Again, they're talking about triple entry accounting is like we haven't gotten there yet. So actually it needs to, and it will be there and it will be there in an amazing way, but it needs to grow into the EDI, because EDI is probably actually capturing everything perfectly on both sides. Right. Like it's cash, and inventory or whatever, that's the missing component we're going to talk about here. So it actually needs to grow into more like that. That's where this needs to go. So when we talk about blockchains being inherently a single entry system, let's just take a real quick example here of a transaction, company A to company B for a computer, and how we can independently verify this transaction on a block explorer, and where it happened on the blockchain. So company A, they send Bitcoin to company B, so it's cash. I'm calling it cash just that's how we think about it. Talk about journal entries. So it's actually Bitcoin out, cash out for 1,000. Company B has cash in from the sale. Now, they can both independently verify, yeah, by sender too, yeah, by saying, okay we're good. Like in real-time. Just in a few minutes you can verify that. But the ledger, the Bitcoin ledger itself, is not a double entry system. You only seeing the cash instead of that transaction. Yeah, what is it for? So we don't know. It could actually be a transfer to another wallet, by the way, that's the thing here. So was it an expense? Was it a capital expense? Was it a transfer to another wallet? So that's the tricky stuff that the auditors and accountants are going to have to find out here. Did it go to another party? Did it go to related party? Did it go to another one of our wallets? Those are the things that we don't know. This is how you would have to record it. This is not what the block chain does, but this is on your own books now. How you would have to record this, is you would have obviously again, Bitcoin cash out, and you're going to record equipment; the equipment piece, and the sales piece here in this journal entry that's not in the Blockchain. Now, these private blockchains and things that stuff is going to happen but we're just talking about specifically. We're just talking about being able to verify a transaction on a blockchain with a Block Explorer. You're only verifying the asset, the so-called cash side of the transaction. The cryptocurrency side of the transaction. You don't know what the other metadata is. We're going to have that. There's models that are working on that, and that's going to be captured with private blockchains but right now it's a bit of a limitation that's challenging. Yes, for sure. So when you think about just even tax, there's implications with taxpayer compliance, revenue collection with tax authorities. So some state-level tax authorities in the United States are accepting Bitcoin, unlikely other cryptocurrencies. So, this is already starting to begin out there. So it's important to start keeping up with what this means and for our profession. Right. Well, just what's going to happen here is that, eventually I think that compliance and collections, kind of two sides of the coin, like you have to do all this compliance work which is again a lot of times non-value added work. Revenue authorities have to do their thing to collect, eventually those are going to merge. This is what's possible here. Sales tax is a really great example because it could be remitted in real time. Yeah. If you are transacting in cryptocurrency, some form of fashion another, when the sale takes place it just takes a piece off. You get your piece, the other piece instantly goes to the state, or maybe it's a multisig wallet and then however that's designed but it has the potential to be in real time. It could be remitted almost on a pro-seller basis and if that was the case and you opt into that, and you encouraged your clients to opt into that, what would that mean? That takes out all the compliance. It's like you wouldn't have to do all that wheel spinning, and potential audit, sales tax audits, and things like that if it all happened in real time. Well, and in other countries, there's been so much automation work on sales tax collections, and they call different things in other countries. Because, there's so much lost revenue to the state of things being misreported, and so forth, and are in the United States is so complex with all the different cities, and counties, and states, and how manual it is when you can actually automate this. I know in the UK, they've even been working on where you'll be required to file sales tax through your accounting software. So that they can make sure that it's actually accurate. I mean, because there's no proof point with sales tax right now that is accurate. So this can be not only great for accountants and not have to spend time, it's also good for small businesses. So now, I have the fear that they're doing it wrong. Because-. The shift is on. Yeah, like when for small businesses they get in so much trouble, because of just not knowing or thinking, oh, I didn't have sales last month so I don't have to file a return, and then having penalties. Where this can actually happen automatically. Right. You could have a case where by choosing the opt-in you then the benefit is that you shield yourself from being audited, or something like that. Is a mutually beneficial thing that can take place there. So we're going to pause here. So, for you to take on your next exercise about revenue collection, and this compliance concept, is you're going to choose one area, and not previously discussed for tax compliance such as corporate tax returns for filing and related payments. State two ways that you think the blockchain could change current antiquated methods, and identify one value proposition for the taxpayer, and one revenue collection that are compelling reasons to change. State one reason the taxpayer, and one reason a revenue collection agency would have pushed back for your proposal. So we're going to pause now, so that you can take some time to think through this exercise.

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